M.S. Ramachandra Rao, J.

This appeal is filed under Section 260 A of the Income Tax Act, 1961 (hereinafter referred to as the "Act") by the Revenue challenging the order dated 24-04-2000 in I.T.A.No.1699/Hyd/95 (Hyderabad 'A' Bench).

2. The facts giving rise in filing of this appeal are as under:

(a) The respondent/assessee filed its return of income for the assessment year 19861987 on 30-06-1986 admitting a loss of Rs.16,27,167/-. Notice under Section 143 (2) of the Act was issued fixing the date of hearing on 01-11-1988. There was no response to this notice. A detailed letter was issued by the Assistant Commissioner of Income Tax, Central Circle-III, Hyderabad (the assessing officer) on 07-12-1988 to the assessee stating that the return was not accompanied by the audited balance sheet and profit and loss account and sought an explanation from the assessee as to various discrepancies noticed in the books of accounts by 14.12.1988. This letter was served on the same date. The assessee requested a month's time for furnishing the details. The assessee was granted time up to 27-12-1988. Subsequently, the assessee filed another letter on 27-12-1988 requesting time up to the end of February 1989. The assessee later filed another letter on 10-01-1989 requesting time up to 15-02-1989 on which date it said it would submit the reply to the letter issued on 07-12-1988. On 06-02-1989, a representative of the assessee appeared and requested time up to 13-02-1989, which was granted. As the assessee had not furnished any information even after giving of three months time and as the assessing officer felt that the assessment was getting barred by limitation by 31-03-1989 vide order dated 20-03-1989, he completed the assessment based on the information available on record to the best of his judgment under S.144 of the Act. He made various additions on account of the discrepancies as per the provisional account and the figures shown in the earlier year. He assessed that the net taxable income of the assessee as Rs.30,50,800/-and directed the assessee to pay tax ,surcharge and interest of Rs.27,62,879/-.

(b) The assessee filed an appeal to the Commissioner of Income Tax (Appeals-II), Hyderabad against the order of assessment dated 20-03-1989 contending that the assessment made was unjust, that the assessing officer erred in drawing adverse inference on account of discrepancies, that the additions made to the income of the assessee were unwarranted and prayed that the additions made be deleted. It contended that the audit for the year end of 30-06-1985 is still not completed on account of closing down the activity group as a whole and that the unit was seized by the APSFC. It also contended that the Company was dormant during the year and depreciation was admissible even in the case of a dormant company and that there was no production and certain minimum expenditure has to be incurred to maintain the Company.

(c) After considering the contentions to the parties, the C.I.T. (Appeals-II), Hyderabad, by order dated 31-08-1995 held that the assessment completed under Section 144 of the Act by the assessment officer is not in accordance with law and deserves to be annulled. He relied on a circular No.281, dated 22-09-1980 issued by the C.B.D.T. Para 27-4 (VI), sub-clause (VI) of which provided as under:

"Where there is a default in rectifying the defect intimated by the ITO., the return of income has to be treated as an invalid return and further proceedings shall have to be taken on the footing that the assessee had failed to furnish the return. Thus in a case where the return is furnished voluntarily under Section 139 (1), the ITO cannot proceed to make ex-parte assessment under Section 144 without serving a notice under Section 139 (2) or as the case may be, under Section 148. Where, however, a defective return was filed in response to a notice under Section 139 (2) or Section 148, the ITO, may straightaway proceed to complete the asse